“If you do not like real estate, all you have to do is make hamburgers, build a business around that hamburger, and franchise it.” — Robert T. Kiyosaki
Robert Kiyosaki in his best-selling book ‘Rich Dad, Poor Dad’ tells the inspirational story of McDonald’s founder Ray Kroc. While interacting with a group of MBA students at the University of Texas, Ray Kroc asked them if they knew what business he ran. The students thought it was a joke. After he asked for the second time, someone from the back yelled that Ray was in the “hamburger business.” Shaking his head, Ray replied he was in the real estate business.
Clearly, Ray did not flip the burgers, he owned the system that created and sold the burgers. McDonald’s owned the real estate on which every store was built which helped the firm collect rent and royalties through land leases to franchise owners. As of 2014 data, its franchisees generate 82% of every dollar of profit in McDonald’s corporation. In other words 82% of the burger company’s profit comes from real estate.
This anecdote presents relevant lessons for today’s times. The first lesson is that physical assets are typically more resilient and productive. The second and more ephemeral lesson is that if you had missed allocation to the Zomato IPO, do not lose heart. You can still invest in real estate and infrastructure assets, which houses restaurants, kitchens and commercial spaces.
Infrastructure and real estate are starting to wake up from a decade-long slumber as investment themes. Shares of DLF, which has a good mix of commercial and residential real estate, are breaking out of a long-term consolidation phase. Market experts say real estate and infrastructure could propel the next round of Bull Run over the next 18 months.
Though REIT and InvIT are relatively new asset classes in India, they are very large globally. These asset classes look appealing on a post-tax returns basis in an environment where interest rates are coming down across the system. This serves two purposes. One, it frees up capital and liquidity for the issuing company. On the other hand, it builds a platform for investors to invest in good quality priced assets. These are very structured products with ease of entry and exit in trading.
High Networth Individuals (HNIs) have warmed up to these asset classes after the successful listing of Embassy, Mindspace and Brookfield. Retail participation will also pick up. We expect the participation in these instruments to become broad-based attracting a wide array of investors.
Investors are looking at the twin possibilities of easy trading and reasonable returns lured by the post listing performance of India Grid and Power Grid IPOs. An issue like Power Grid gave investors an opportunity to invest in the AAA-rated PSUs and provided reasonable post-tax returns.
According to our estimates, Rs 3.85 lakh crore (trillion) of assets are likely to be listed in the next 2-3 years which will help build and sustain an exchange traded infrastructure ecosystem. In InvIT alone, there could be potentially Rs 2.5 lakh crore worth of new issuances. According to JLL estimates, India’s current office markets across seven major cities have around 284 million sq. feet that could be securitised with an estimated value of $36 billion (Rs 2, 62,800 crore).
Foreign funds will pounce on this $36b opportunity. HNIs and retail investors are also likely to pour a gush of money into REITs and InvIT. Even real estate developers are warming up to the idea.
List of upcoming REIT/Invit:
REIT: DLF REIT
Invit: NHAI Invit (Roads), Shrem Invit (Roads), KKR Invit (Renewable). Moreover, in the Union Budget 2021-22, GOI has indicated interest to monetize dedicated rail corridor assets, airport assets, oil and gas pipelines of GAIL, IOCL and HPCL, Warehousing Assets of CPSEs such as Central Warehousing Corporation and NAFED and Sports Stadiums
The pipeline of InvIT issuances looks very good. DLF, RMC, Nitesh Estates are lined up in the near future. Embassy Office Parks, Mindspace Business Parks and the Brookfield India Real Estate Trust, which recently had a blockbuster listing, are the three REITs traded on exchanges. While India has currently 15 registered infrastructure investment trusts. IRB InvIT Fund and the IndiGrid Trust InvIT have rebounded sharply recently after the initial volatility.
Table on returns
Even in the current situation, the pre-tax annual dividend yields of the listed REIT and InvIT are higher than fixed deposits, government bonds and other debt mutual funds as is shown in the chart below.
^Closing price as of 16-Jul-2021.
*Indicative numbers. Highest tax bracket assumed for post-tax yield calculation
Not only these instruments give superior relative returns, they are also great tools for a balanced, diversified portfolio in the current times of unprecedented euphoria. It is important for investors to focus on a balanced portfolio. It is now more than ever important for investor portfolios to balance the objectives of growth with stability and sustainability. Investors should increase allocation to exchange traded real estate and infrastructure products to benefit from the unprecedented boom in the infrastructure sector over the next few years in India.
(By Alok Saigal, Head-Private Wealth, Edelweiss Wealth Management)
Disclaimer: These are the author’s personal views. Please consult your financial advisor before making any investment)